Macquarie's Big Shifts In Banking: Revised Ratings For IndusInd Bank, PB FinTech, HDFC Life

Macquarie has shifted gears on various players across the Indian financial sector. Calling the sector stable, strong, and resilient, the brokerage expects mid-teen EPS growth. While the margin issues in the sector continues to persist, the analyst expects banks to deliver up to 15% growth over the coming three years, driven by improving credit growth and moderating credit costs.

The brokerage prefers large private banks, citing selective risk-reward opportunities. Analysts also flag regulatory overhang in the insurance sector. Regarding specific banks, Macquarie expects Net Interest Margins to remain stable, with strong earnings per share CAGR of up to 15%.

"A pick-up in unsecured credit growth to provide margin cushion as we expect that unsecured NPL issues will abate in 1H. We expect margins to fully recover in FY27E and expect a modest recovery in credit growth," Macquarie said.

Despite front-loading of 100bps rate cuts in financial year 2026, it expects margin compression to be limited. Private sector banks are poised for continued strong growth, due to their robust balance sheets and improving return on equity or ROEs except for Kotak, according to analysts.

The brokerage's only upgrade is PB Fintech as the rating has been changed to 'outperform' from 'neutral', along with a new target price of Rs 1,945.

Coming to the many downgrades in the sector, IndusInd Bank sees the sharpest cut in target price along with the double downgrade from 'outperform' to 'underperform'. The new target price is at Rs 650, much lower than the older price target of Rs 1,210.

Both Kotak Bank and SBI Cards got a downgrade from 'outperform' to 'neutral' but the target price has been hiked to Rs 2,300 and Rs 1,040, respectively. HDFC Life has also been downgraded to 'underperform' from 'neutral' and the revised target price is Rs 720.

Macquarie's top picks among banks are HDFC Bank and Axis Bank. Additional Aditya Birla Capital, Power Finance Corp., Shriram Housing Finance Ltd., and LIC also make the top picks list.

PSU banks had earned market share earlier, but are expected to see loss of this due to terms of deposits which is structurally negative. The ROE is also lower which will results in a sharp margin compression. ROE declines are sharp in the near term due to higher leverage.

NBFCs are expected to benefit from rate cuts, though they might experience lower growth, that is 17% for retail NBFCs over the three coming years, compared to the 25% in financial 2024.

"We expect credit costs to decline as unsecured stress abates. Our bias is more towards low-valuation NBFCs, for which we believe the risk-reward is more favourable," according to the brokerage.

In the insurance sector, Veygo is expected to see strong growth, while LIC may face challenges. The near-term sector will face APE growth challenges, but believes RBI's regulation on mis-selling of financial products could be a game-changer for life insurers, Macquarie said.